SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 1996
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 1-11856
TIG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3172455
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
65 EAST 55TH STREET, 28TH FLOOR
NEW YORK, NEW YORK 10022
(Address of principal executive offices)
(212) 446-2700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---------- ----------
Number of shares of Class A Common Stock, $0.01 par value per share,
outstanding as of close of business on March 31, 1996: 35,793 shares, and number
of shares of Common Stock, $0.01 par value per share, outstanding as of close of
business on March 31, 1996: 58,846,498 excluding 5,491,500 treasury shares.
<PAGE>
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed consolidated balance sheets as of March 31, 1996
(unaudited) and December 31, 1995............................. 1
Condensed consolidated statements of income for the three
months ended March 31, 1996 (unaudited) and March 31, 1995
(unaudited)................................................... 2
Condensed consolidated statement of changes in shareholders'
equity for the three months ended March 31, 1996 (unaudited).. 3
Condensed consolidated statements of cash flows for the three
months ended March 31, 1996 (unaudited) and March 31, 1995
(unaudited)................................................... 4
Notes to condensed consolidated financial statements
(unaudited)................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
2.1 Consolidated Results.......................................... 8
2.2 Reinsurance................................................... 11
2.3 Retail........................................................ 13
2.4 Commercial Specialty.......................................... 15
2.5 Other Lines................................................... 17
2.6 Investments................................................... 18
2.7 Reserves...................................................... 21
2.8 Liquidity and Capital Resources............................... 22
2.9 Glossary...................................................... 23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................. 25
Exhibit 11 - Computation of Earnings Per Share (unaudited).... 26
SIGNATURES............................................................ 27
<PAGE>
<TABLE>
TIG HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, December 31,
(In millions, except share data) 1996 1995
---------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Investments:
Fixed maturities at market
(cost: $4,256 in 1996 and $4,233 in 1995 ) $4,297 $4,402
Short-term and other investments, at cost which
approximates market 114 148
------- -------
Total investments 4,411 4,550
Cash 1 4
Accrued investment income 57 56
Premium receivable (net of allowance of: $4 in 1996 424 409
and $3 in 1995)
Reinsurance recoverable (net of allowance of: $9 in 1,232 1,221
1996 and 1995)
Deferred policy acquisition costs 147 144
Prepaid reinsurance premium 107 111
Income taxes 157 60
Other assets 123 128
------- -------
Total assets $6,659 $6,683
======= =======
LIABILITIES
Reserves for:
Losses $3,306 $3,288
Loss adjustment expenses 582 598
Unearned premium 726 712
------- -------
Total reserves 4,614 4,598
Dividends to policyholders 25 30
Reinsurance premium payable 57 69
Funds withheld under reinsurance agreements 191 151
Notes payable 119 120
Other liabilities 411 314
------- -------
Total liabilities 5,417 5,282
MANDATORY REDEEMABLE PREFERRED STOCK 25 25
SHAREHOLDERS' EQUITY
Common stock - par value $0.01 per share
(authorized: 180,000,000 shares; issued and
outstanding:64,337,998 shares in 1996 and
64,125,050 shares in 1995) 1,188 1,186
Class A convertible common stock - par value $0.01
per share (authorized: 1,000,000 shares;
issued and outstanding: 35,793 shares in
1996 and 1995) 1 1
Retained earnings 134 168
Net unrealized gain on fixed maturity investments,
net of taxes 27 110
Net unrealized loss on foreign currency, net of
taxes (1) (1)
------- -------
1,349 1,464
Treasury stock (5,491,500 shares in 1996 and
4,041,100 shares in 1995) (132) (88)
------- -------
Total shareholders' equity 1,217 1,376
------- -------
Total liabilities and shareholders' equity $6,659 $6,683
======= =======
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
TIG HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months
Ended March 31,
----------------
(In millions, except per share data) 1996 1995
<S> <C> <C>
REVENUES
Net premium earned $386 $418
Net investment income 69 65
Net realized investment loss - (13)
----- ------
Total revenues 455 470
LOSSES AND EXPENSES
Net losses and loss adjustment expenses incurred 306 309
Commissions and premium related expenses 89 96
Other operating expenses 41 42
Dividends to policyholders 1 3
Restructuring charges 100 -
----- ------
Total losses and expenses 537 450
(Loss) income before income tax benefit (expense) (82) 20
Income tax benefit (expense) 51 (2)
NET (LOSS) INCOME $(31) $18
------ -----
NET (LOSS) INCOME PER COMMON SHARE $(0.53) $0.28
------- ------
DIVIDEND PER COMMON SHARE $0.05 $0.05
------- ------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
TIG HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT
OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Unrealized Foreign Total
Class A Investment Currency Share-
Common Common Retained Gain Translation Treasury holders'
(In millions) Stock Stock Earnings (Loss) Adjustment Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $1,186 $1 $168 $110 $(1) $(88) $1,376
Net loss (31) (31)
Common stock dividends (3) (3)
Common stock issued 1 1
Amortization of unearned
compensation 1 1
Treasury stock (44) (44)
Change in net unrealized
gain on fixed maturity
investments (83) (83)
- - -----------------------------------------------------------------------------------------------
Balance at March 31, 1996 $1,188 $1 $134 $27 $(1) $(132) $1,217
===============================================================================================
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
TIG HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Three Months
Ended March 31,
(In millions) 1996 1995
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $(31) $18
Adjustments to reconcile net (loss) income to cash provided by
operating activities:
Changes in:
Loss reserves 18 43
Loss adjustment expense reserves (16) (11)
Unearned premium reserves 14 16
Reinsurance recoverable (11) (45)
Prepaid reinsurance premium 4 (15)
Premium receivable (15) (20)
Deferred policy acquisition costs (3) (5)
Dividends to policyholders (5) (3)
Funds withheld under reinsurance agreements 40 6
Reinsurance premium payable (12) 1
Other assets and Other liabilities 102 18
Accrued investment income (1) 2
Income taxes (52) 2
Investment loss - 13
Other 18 1
---- ----
Net cash provided by operating activities 50 21
INVESTING ACTIVITIES
Purchases of fixed maturity investments (719) (417)
Sales of fixed maturity investments 615 422
Maturities and calls of fixed maturity investments 63 40
Net (increase) decrease in short-term and other investments 34 (25)
Other - (30)
----- -----
Net cash used in investing activities (7) (10)
FINANCING ACTIVITIES
Common stock issued 1 -
Acquisition of treasury stock (44) (8)
Common stock dividends (3) (3)
Other - (1)
---- ----
Net cash used in financing activities (46) (12)
Decrease in cash (3) (1)
Cash at beginning of period 4 9
---- ----
Cash at end of period $1 $8
==== ====
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
TIG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1996
(Unaudited)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. TIG Holdings, Inc. ("TIG Holdings") is primarily engaged
in the business of property/casualty insurance and reinsurance through its 16
insurance subsidiaries (collectively "TIG" or "the Company"). The accompanying
unaudited condensed consolidated financial statements include the accounts of
TIG Holdings and its subsidiaries and have been prepared in accordance with
generally accepted accounting principles ("GAAP") for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments, including normal
recurring accruals, considered necessary for a fair presentation have been
included. Financial statements prepared in accordance with GAAP require the use
of management estimates. Certain reclassifications of prior year amounts have
been made to conform with the 1996 presentation.
Operating results for the three months ended March 31, 1996 are not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in TIG's annual report on Form 10-K for the year ended December
31, 1995.
EARNINGS PER SHARE ("EPS"). Primary EPS for the three months ended March 31,
1996 and 1995 is calculated based upon the weighted average common shares
outstanding ("average shares") during the period. In order to calculate average
shares, unallocated ESOP shares and treasury shares are deducted from the
outstanding common shares. Class A common stock and common stock options are
considered common stock equivalents and are included in average share
calculations if dilutive. Common stock equivalents were excluded from the EPS
computation for the three months ended March 31, 1996, as their inclusion would
decrease the net loss per share. To obtain net income attributable to common
shareholders for EPS computations, the preferred stock dividend is deducted from
net income. Refer also to Exhibit 11.
INCOME TAXES. Deferred federal income taxes are provided for differences
between the financial statement amounts and tax basis of assets and liabilities.
Deferred income taxes at March 31, 1996 and December 31, 1995 included a
deferred liability of $14 million and $59 million, respectively, related to net
unrealized investment gains.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES. The liability for unpaid losses and
loss adjustment expenses ("LAE") is based on an evaluation of reported losses
and on estimates of incurred but unreported losses. The reserve liabilities are
determined using adjusters' individual case estimates and statistical
projections. The liability is reported net of estimated salvage and subrogation
recoverable. Adjustments to the liability resulting from subsequent
developments or revisions to the estimate are reflected in results of operations
in the period in which such adjustments become known. While there can be no
assurance that the reserves at any given date are adequate to meet TIG's
obligations, the amounts reported on the balance sheet are management's best
estimate of that amount.
<PAGE>
TIG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1996
(Unaudited)
NOTE B. RESTRUCTURING CHARGES
In February 1996, TIG announced the reorganization of its commercial operations
and plans to exit certain lines of business that failed to meet profitability
standards. As a result of this reorganization, TIG has taken the following
actions: 1) combined its Specialty Commercial and Worker's Compensation
divisions to form a new division called Commercial Specialty, 2) identified
field offices for consolidation and closure, 3) identified lines of business for
non-renewal or cancellation for which 1995 net premium written was approximately
$190 million or 12% of consolidated 1995 net premium written, 4) formed a run-
off division to administer contractually required policy renewals for run-off
lines of business, and 5) notified approximately 600 employees that their
positions would be eliminated - approximately 400 by May 31, 1996 and the
remainder no later than December 1997. Management estimates that most run-off
lines policies will be non-renewed by the end of 1997.
TIG recorded a $100 million accrual in first quarter 1996 for estimated
restructuring charges comprised of severance of $17 million; contractual policy
obligations of $37 million; office lease terminations of $18 million; furniture,
equipment and capitalized software write-downs of $12 million; and a reserve for
litigation and credit issues related to terminated producers of $16 million.
The remaining reserve at March 31, 1996 is $88 million. Charges against the
restructuring accrual of $12 million in the first quarter 1996 are comprised of
lease buyouts of $9 million and costs of contractual policy obligations of $3
million. The components of the underwriting loss from the Other Lines division,
which includes all run-off operations, are as follows:
Three Months Ended
March 31,
(In millions) 1996 1995
Premium earned $74 $117
Losses and LAE incurred (See Note C) (84) (87)
Underwriting expenses (23) (45)
----- -----
Underwriting loss $(33) $(15)
===== =====
NOTE C. LOSS RESERVES
In connection with the February 1996 restructuring, TIG completed a re-
evaluation of loss and LAE reserves related to run-off lines using additional
loss development data received during first quarter 1996. This data confirmed
adverse loss development trends which were observed in the second half of 1995
which was a consideration in the decision to exit certain lines of business as
discussed in Note B. As a result of this re-evaluation and management's belief
that the restructuring decision will make the claims settlement environment less
consistent and more volatile, TIG increased loss and LAE reserves for run-off
lines by $31 million, principally for the Transportation and Large Programs
units.
<PAGE>
TIG HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1996
(Unaudited)
NOTE D. INCOME TAXES
In March 1996, TIG entered into settlement agreements with the IRS on several
outstanding audit assessments, which resulted in a redetermination of certain
tax liabilities related to prior tax years. As a result of the redetermination,
a $20 million deferred tax benefit was recognized in the first quarter of 1996.
Accordingly, the effective tax rate for the first quarter will not necessarily
approximate the estimated effective tax rate for the full year.
NOTE E. CONTINGENCIES
TIG's insurance subsidiaries are routinely engaged in litigation in the normal
course of their business. As a liability insurer, the Company defends third-
party claims brought against its insureds. As an insurer, the Company defends
against coverage claims. On January 11, 1994, a Los Angeles County Superior
Court jury returned a verdict of $28 million for punitive damages against TIG in
Talbot Partners v. Cates Construction, Inc. and TIG Insurance Company ("TIC").
The award arose out of TIC's handling of a surety bond claim on a construction
project. Management is vigorously pursuing its right to appeal the judgment.
TIC is presently litigating with the carriers of its errors and omissions
insurance policies as to coverage for punitive damages under the agreed upon
language of the policies. Management believes, however, that the ultimate
liability, if any, arising from this case will not materially impact
consolidated operating results.
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2.1 CONSOLIDATED RESULTS
TIG Holdings, Inc. ("TIG Holdings") and its subsidiaries (collectively "TIG" or
the "Company") offer property/casualty insurance and reinsurance throughout the
United States through three major operating divisions: Reinsurance, Retail, and
Commercial Specialty. Products that have been de-emphasized or placed into
run-off are included in the Other Lines division. The following analysis
provides an assessment of TIG's financial results for the three months ended
March 31, 1996 as compared to the three months ended March 31, 1995 and material
changes in financial position from December 31, 1995 to March 31, 1996. TIG
Holdings would like to caution readers regarding certain forward-looking
statements in the following discussion and elsewhere in this Form 10-Q. While
TIG Holdings believes in the veracity of all statements made herein,
forward-looking statements are necessarily based upon a number of estimates and
assumptions that, while considered reasonable by TIG Holdings, are inherently
subject to significant business, economic, and competitive uncertainties and
contingencies, including without limitation changes in interest rates, increased
competition, increases in catastrophes, and regulatory changes, many of which
are beyond TIG Holdings' control and many of which, with respect to future
business decisions, are subject to change. These uncertainties and
contingencies can affect TIG Holdings' actual results and could cause its actual
results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, TIG Holdings.
Results of operations for the three months ended March 31, 1996 and 1995 are
presented below. Certain reclassifications of prior period amounts have been
made to conform with the current period presentation. Key industry terms are
defined at Item 2.9 - Glossary and are italicized the first time used in the
following discussion:
Three Months Ended
March 31,
(In millions) 1996 1995
Gross premium written $508 $488
Net premium written $404 $419
Net premium earned $386 $418
Less: Net loss and LAE incurred 306 309
Commission expense 75 77
Premium related expense 14 19
Other underwriting expense 32 34
Policyholder dividends incurred 1 3
---- ----
Underwriting loss (42) (24)
Net investment income 69 65
Net realized investment loss - (13)
Corporate expenses (7) (8)
Interest expense (2) -
Restructuring charges 100 -
---- ----
(Loss) income before tax benefit (expense) (82) 20
Income tax benefit (expense) 51 (2)
----- ----
Net (loss) income $(31) $18
===== ====
Income excluding investment losses and
restructuring charges $34 $26
===== ====
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW. TIG reported a net loss for first quarter 1996 due to restructuring
charges of $100 million recorded in connection with the reorganization of
commercial operations and the decision to exit certain underperforming programs.
Income excluding restructuring charges and investment losses increased 31% to
$34 million in first quarter 1996 compared to $26 million in 1995 as a $20
million deferred tax benefit recorded in first quarter 1996 more than offset an
$18 million increase in underwriting loss attributable to Other Lines. The
underwriting loss from Other Lines increased due to reserve strengthening of $31
million recorded for certain run-off programs, which added 8.0 percentage points
to the first quarter 1996 consolidated statutory loss and LAE ratio. Reductions
in Other Lines operating expenses partially offset this reserve strengthening.
First quarter 1996 restructuring charges, reserve strengthening and income taxes
are discussed further below. The following table presents the components of
TIG's consolidated statutory combined ratio:
Three Months Ended
March 31,
1996 1995
STATUTORY RATIOS:
Loss and LAE 79.2 74.3
------ ------
Commission expense 19.4 19.5
Premium related expense 3.5 4.4
Other underwriting expense 7.6 8.2
------ ------
Total underwriting expense 30.5 32.1
Policyholder dividends 1.6 1.4
------ ------
Combined ratio 111.3 107.8
====== ======
Consolidated net premium written declined by $15 million or 3.6% in first
quarter 1996 compared to 1995 as premium growth in on-going divisions did not
completely offset a $35 million decline in Other Lines premium. For first
quarter 1996 compared to 1995, Reinsurance net premium written increased by 10%
and Retail net premium written increased by 14%. However, Commercial Specialty
net premium written declined slightly due to continued price competition in the
workers' compensation market. The ratio of net premium written to gross premium
written declined from 85.9 in first quarter 1995 to 79.5 in 1996 primarily due
to the 90% cession of one Other Lines program which was effective in the second
quarter of 1995. The following table shows net premium written by division and
the percentage of consolidated net premium written by each division:
Three Months Ended March 31,
1996 1995
(In millions) NPW % NPW %
Reinsurance $137 34% $124 30%
Retail 87 22% 76 18%
Commercial Specialty 118 29% 122 29%
Other Lines 62 15% 97 23%
----- ----- ----- -----
Total $404 100% $419 100%
===== ===== ===== =====
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESTRUCTURING CHARGES. In February 1996, TIG announced the reorganization of
its commercial operations and plans to exit certain lines of business that
failed to meet profitability standards. As a result of this reorganization, TIG
has taken the following actions: 1) combined its Specialty Commercial and
Worker's Compensation divisions to form a new division called Commercial
Specialty, 2) identified field offices for consolidation and closure, 3)
identified lines of business for non-renewal or cancellation for which 1995 net
premium written was approximately $190 million or 12% of consolidated 1995 net
premium written, 4) formed a run-off division to administer contractually
required policy renewals for run-off lines of business, and 5) notified
approximately 600 employees that their positions would be eliminated -
approximately 400 by May 31, 1996 and the remainder no later than December 1997.
Management estimates that most run-off lines policies will be non-renewed by the
end of 1997.
TIG recorded a $100 million accrual in first quarter 1996 for estimated
restructuring charges comprised of severance of $17 million; contractual policy
obligations of $37 million; office lease terminations of $18 million; furniture,
equipment and capitalized software write-downs of $12 million; and a reserve for
litigation and credit issues related to terminated producers of $16 million.
The remaining reserve at March 31, 1996 is $88 million. Charges against the
restructuring accrual of $12 million are comprised of lease buyouts of $9
million and costs of contractual policy obligations of $3 million.
RESERVE STRENGTHENING. In connection with the February 1996 restructuring, TIG
completed a re-evaluation of loss and LAE reserves related to run-off lines
using additional loss development data received during first quarter 1996.
This data confirmed adverse loss development trends first observed in the second
half of 1995 which resulted in the decision to exit certain lines of business.
As a result of this re-evaluation, and the decreased ability to manage claim
settlement for lines placed in run-off, TIG increased loss and LAE reserves for
run-off lines by $31 million, principally for the Transportation and Large
Programs units.
INCOME TAXES. In March 1996, TIG entered into settlement agreements with the
IRS on several outstanding audit assessments, which resulted in a
redetermination of certain tax liabilities related to prior tax years. As a
result of this redetermination, a $20 million deferred tax benefit was
recognized in first quarter 1996. Accordingly, the effective tax rate for the
first quarter will not necessarily approximate the estimated effective tax rate
for the full year.
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2.2 REINSURANCE
TIG's reinsurance operations are conducted through TIG Reinsurance Company ("TIG
Re") which is based in Stamford, Connecticut. TIG Re's strategy is to focus on
excess of loss casualty coverages, written on a treaty basis, generally taking
large treaty participations. By assuming a significant participation in each
treaty, TIG Re exercises substantial control over the terms and structure of
each treaty. TIG Re typically seeks to write treaties attaching within working
layers, where losses are more predictable and a higher premium is available.
Underwriting results for TIG Re are presented below:
Three Months Ended March 31,
(In millions) 1996 1995
Gross premium written $148 $143
Net premium written $137 $124
Net premium earned $129 $119
Less: Net loss and LAE incurred 93 89
Commission expense 33 28
Other underwriting expense 6 6
----- -----
Underwriting loss $(3) $(4)
===== =====
PREMIUM. TIG Re focuses on long-term relationships with clients who meet their
underwriting standards and share their partnership perspective. While overall
market conditions have not improved substantially, TIG Re continues to see
significant profitable opportunities and has maintained a growth rate comparable
to that of other top tier reinsurance companies. Gross and net premium written
increased by 3.5% and 10.5%, respectively, for the first three months of 1996
compared to the prior year due to new business written of $35.3 million and
growth in premium on inforce treaties. Approximately 86% and 84% of business
eligible for renewal in the first quarter of 1996 and 1995, respectively, was
retained. The ratio of net written to gross written premium increased 5.9
percentage points to 92.6% in first quarter 1996 due to the restructuring of one
program to be assumed on a net basis instead of a gross basis. Gross premium
produced through TIG Re's London office was $8.0 million for the first three
months of 1996, as compared to $6.3 million for the same period in 1995. The
following table summarizes TIG Re's net premium written by statutory line of
business:
Three Months Ended March 31,
1996 1995
(In millions) NPW % NPW %
Property $ 26 19% $ 28 23%
Medical Malpractice 26 19% 16 13%
Automobile Liability 23 17% 6 5%
Errors & Omissions 23 17% 23 18%
General Liability 21 15% 21 17%
Other 18 13% 30 24%
----- ---- ----- ----
Total $137 100% $124 100%
===== ==== ===== ====
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UNDERWRITING RESULTS. The improvement in TIG Re's underwriting results in 1996
over 1995 is consistent with management's expectations and reflects management's
selection of clients and programs meeting strict criteria for adequate returns.
The statutory combined ratio for first quarter 1996 improved by 2.6 percentage
points over 1995, primarily as a result of a lower loss and LAE ratio. The loss
and LAE ratio improvement reflects a change in mix towards better performing
lines of business. There has been some upward changes in commission and
brokerage rates on business renewed in 1996 but most casualty accounts have been
renewed at expiring terms. The following table presents the components of TIG
Re's statutory combined ratio:
Three Months Ended
March 31,
STATUTORY RATIOS: 1996 1995
Loss and LAE 71.6 75.0
------ ------
Commission expense 25.5 25.1
Premium related expense 0.2 -
Other underwriting expense 4.5 4.3
------ ------
Total underwriting expense 30.2 29.4
------ ------
Combined ratio 101.8 104.4
====== ======
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2.3 RETAIL
The Retail division, based in Battle Creek, Michigan, principally provides
single-risk, independent agency produced property and liability coverage to
targeted individuals and small businesses. Coverages include automobile
policies which cover liabilities to third parties for bodily injury and property
damage which cover physical damage to the insured's own vehicle resulting
from collision or various other causes of loss. Homeowners/commercial property
policies protect against loss of dwellings/buildings and contents arising from a
variety of perils, as well as liability arising from ownership or occupancy.
The following table presents underwriting results for Retail:
Three Months Ended March 31,
(In millions) 1996 1995
Gross premium written $99 $90
Net premium written $87 $76
Net premium earned $84 $70
Less: Net loss and LAE incurred 59 52
Commission expense 14 12
Premium related expense 4 4
Other underwriting expense 7 6
---- -----
Underwriting loss $ - $(4)
==== =====
PREMIUM. Gross premium written increased by approximately 10.0% for first
quarter 1996 compared to 1995. The increase occurred primarily in the non-
standard automobile lines as a result of new business in the eastern half of the
nation and from California rate increases effective in mid-1995. In addition,
rate increases ranging from 2.7% to 11.0% on homeowners and automobile products
were implemented during the first quarter of 1996 in Illinois, Utah, Michigan,
Ohio and Arizona. The following table summarizes Retail net premium written by
major products:
Three Months Ended March 31,
1996 1995
(In millions) NPW % NPW %
Automobile $44 51% $42 55%
Property 20 22% 18 24%
Non-standard automobile 13 15% 7 9%
Upscale property 5 6% 5 7%
All other 5 6% 4 5%
---- ---- ---- ----
Total $87 100% $76 100%
==== ==== ==== ====
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UNDERWRITING RESULTS. The Retail division's underwriting results for first
quarter 1996 improved by $4 million compared to the corresponding prior year
period due primarily to a reduction in catastrophe costs to $3 million from $7
million for first quarter 1995. The 1996 catastrophe costs principally related
to the winter storms in the northeastern United States. The 1995 catastrophe
costs were primarily attributable to windstorm, rain and flood losses due to the
seasonal storms in the western and southwestern United States. The following
table presents the components of Retail's statutory combined ratios:
Three Months Ended
March 31,
STATUTORY RATIOS 1996 1995
Loss and LAE 70.2 73.9
------ ------
Commission expense 17.2 17.3
Premium related expense 4.8 5.5
Other underwriting expense 8.3 8.1
Total underwriting expense 30.3 30.9
Combined ratio 100.5 104.8
------ ------
Combined ratio excluding
catastrophes 96.3 94.5
====== ======
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2.4 COMMERCIAL SPECIALTY
Commercial Specialty is comprised of the following business units: Workers'
Compensation, Sports & Leisure, Excess Casualty, Commercial Auto & Related and
Other Commercial. Workers' Compensation provides benefits to employees as
mandated by state laws for employment-related accidents, injuries or illnesses.
Sports & Leisure offers insurance products for organizers and participants in
sporting events, entertainment and leisure activities. Coverages include
liability, property, automobile, workers' compensation and participant accident
and health insurance. Excess Casualty underwrites umbrella and excess casualty
coverages for manufacturing, financial and service businesses with specific
focus on the first layer of excess liability. Commercial Auto & Related covers
liability to third parties for bodily injury and property damage, and covers
physical damage to the insured's own vehicle. Commercial Auto & Related
policies are generally issued to business and governmental entities,
organizations and associations. Other Commercial includes: Construction, Marine,
Excess & Surplus, and Professional Liability. Underwriting results for
Commercial Specialty are presented below:
Three Months Ended March 31,
(In millions) 1996 1995
Gross premium written $153 $151
Net premium written $118 $122
Net premium earned $99 $112
Less: Net loss and LAE incurred 70 81
Commission expense 19 17
Premium related expense 5 7
Other underwriting expense 10 5
Policyholder dividends incurred 1 3
---- ----
Underwriting loss $(6) $(1)
==== ====
PREMIUM. First quarter 1996 net premium written decreased by $4 million compared
to 1995, as growth in Commercial Auto & Related programs was offset by a $16
million decline in Workers' Compensation premium. Workers' compensation reforms
have been enacted by a number of states, intensifying competitive market
conditions nationwide. Due to the changing environment, TIG's workers'
compensation marketing plan will continue to be cautious, in line with
disciplined underwriting, and remain focused on small to intermediate size
customers using a template underwriting approach. The following table summarizes
Commercial Specialty net premium written by business unit.
Three Months Ended March 31,
1996 1995
(In millions) NPW % NPW %
Workers' Compensation $57 48% $73 60%
Sports & Leisure 30 26% 32 26%
Commercial Auto & Related 12 10% 4 3%
All other 19 16% 13 11%
----- ---- ----- ----
Total $118 100% $122 100%
===== ==== ===== ====
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UNDERWRITING RESULTS. The Commercial Specialty Division's combined ratio
increased 4.4 percentage points for first quarter 1996 compared to 1995 due
principally to increased commission expenses and other underwriting expenses.
The increase in commission expense was due to increased writings for program
business produced through managing general agents. Underwriting expenses
increased primarily due to start up costs for new programs. The following table
summarizes the components of Commercial Specialty's statutory combined ratio:
Three Months Ended
March 31,
STATUTORY RATIOS 1996 1995
Loss and LAE 70.3 72.7
------ ------
Commission expense 18.8 16.1
Premium related expense 4.9 6.0
Other underwriting expense 8.5 4.0
------ ------
Total underwriting expense 32.2 26.1
Policyholder dividends 5.6 4.9
------ ------
Combined ratio 108.1 103.7
====== ======
TIG's statutory policyholder dividends ratio is a function of profitability of
the business, timing of payments, and the number of participating policies,
primarily in California. Dividend payments are made in current periods based on
prior periods' results. Although the statutory policyholders dividend ratio
increased in first quarter 1996, a decrease in participating policies in
California contributed to lower GAAP policyholder dividends incurred in first
quarter 1996 compared to 1995.
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2.5 OTHER LINES
Other Lines principally includes commercial products which have been placed in
run-off due to failure to meet profitability standards. Approximately 95% of
first quarter 1996 net premium written was placed in run-off in March 1996 with
the remainder being placed in run-off in June 1995. Most premium written in
run-off programs after the "exit date" represents contractually required
renewals. Other Lines premium is expected to be completely non-renewed by late
1997. Underwriting results for Other Lines are presented below:
Three Months Ended
March 31,
(In millions) 1996 1995
Gross premium written $108 $115
Net premium written $62 $97
Net premium earned $74 $117
Less: Net loss and LAE incurred 84 87
Commission expense 9 20
Premium related expense 5 8
Other underwriting expense 9 17
----- -----
Underwriting loss $(33) $(15)
===== =====
STATUTORY RATIOS:
Loss and LAE 115.3 75.4
------ ------
Commission expense 10.0 18.3
Premium related expense 6.3 7.0
Other underwriting expense 12.2 18.8
------ ------
Total underwriting expense 28.5 44.1
Policyholder dividends 0.9 0.2
------ ------
Combined ratio 144.7 119.7
====== ======
As discussed at Item 2.1, TIG increased loss and LAE reserves for Other Lines by
$31 million during first quarter 1996. This reserve strengthening increased
the first quarter 1996 loss and LAE ratio by approximately 41.9 percentage
points. Management estimates that underwriting results for Other Lines will be
approximately break-even for the remainder of 1996.
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2.6 INVESTMENTS
INVESTMENT MIX. Management continues to emphasize a conservative investment
strategy by maintaining a portfolio of high-quality, principally fixed maturity
investments. TIG's entire fixed maturity portfolio has been classified as
available-for-sale. As a result, all fixed maturity investments are recorded in
TIG's financial statements at market value. Unrealized gains and losses on
fixed maturity investments and related hedges are recorded net of tax directly
in shareholders' equity. Following is a summary of TIG's investment portfolio
by type of investment.
March 31, 1996 December 31, 1995
% of % of
Market Market Market Market
(In millions) Value Portfolio Value Portfolio
Municipal bonds $567 12.9 $951 20.9
Mortgage-backed securities 1,489 33.8 1,405 30.9
United States government bonds 1,298 29.4 1,388 30.5
Corporate and other bonds 943 21.4 658 14.5
------- ------ ------- ------
Total fixed maturity investments 4,297 97.5 4,402 96.8
Short-term and other investments 114 2.5 148 3.2
------- ------ ------- ------
Total invested assets $4,411 100.0 $4,550 100.0
======= ====== ======= ======
During first quarter 1996, tax-exempt municipal bonds and certain other lower
yielding securities were disposed of in favor of higher yielding corporate bonds
and mortgage-backed securities. As a result, the pre-tax book yield of the
portfolio increased to 7.02% at March 31, 1996 from 6.70% at December 31, 1995.
Approximately one-third of TIG's portfolio consists of mortgage-backed
securities ("MBS"). United States federal government and government agency
backed mortgage securities now represent approximately 90% of TIG's exposure to
MBS offering AAA credit quality and relatively high yields. In exchange for
these benefits, however, the timing of ultimate repayment of principal remains
uncertain during the life of the investment, as it is dependent on the
prepayment and refinancing activity of the underlying homeowners. All MBS held
in the portfolio are able to be actively traded in the public market. The
market value of MBS can be affected during periods of high interest whereby the
MBS would be subject to repayment of principal earlier than originally
anticipated. If this does occur, TIG's investment income levels could be
negatively impacted. Earnings could also be affected by any capital gains or
losses realized on these partial prepayments as TIG would receive the principal
amount of the securities which may have been purchased at a premium or discount
to such principal amount. TIG's consolidated financial results have not been
materially impacted by prepayments of MBS.
TIG's objective is to maintain the weighted average maturity of its investment
portfolio between 8 and 11 years and the weighted average duration between 4 and
12 years. At March 31, 1996, the weighted average maturity of TIG's investment
portfolio was 8.5 years compared to 8.9 years at December 31, 1995. At March
31, 1996, the weighted average duration of TIG's investment portfolio was 5.1
years compared to 5.8 years at December 31, 1995.
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
From time to time, TIG sells futures contracts to hedge its interest rate and
market exposures on thirty-year U.S. Treasury bonds. Risks arise from movements
in the futures contracts' values. Futures contracts are carried at market
value, with gains and losses recognized as adjustments to the carrying value of
the hedged investment. At March 31, 1996, the face amount of open futures
contracts was $50 million as compared to $25 million at December 31, 1995.
During the fourth quarter of 1995, TIG entered into commitments to purchase
securities on a "To Be Announced" ("TBA") basis for which the interest rate risk
remains with TIG until the date of delivery and payment. Delivery and payment
of MBS purchased on a TBA basis can take place a month or more after the date of
the transaction. These securities are subject to market fluctuations during
this period and it is the Company's policy to recognize any gains or losses only
when they are realized. TIG maintains cash and securities with a fair value
exceeding the amount of its TBA purchase commitments. At March 31, 1996, the
TBA purchase commitments amounted to $87.5 million and had a fair value of $87.0
million compared to TBA commitments of $152.2 million and fair value of $153.1
million at December 31, 1995.
UNREALIZED GAINS. Net pre-tax unrealized gains decreased by $128 million during
the first three months of 1996 as a result of increasing market interest rates.
As of March 31, 1996, the aggregate net unrealized gain on TIG's investment
portfolio was $41 million ($27 million net of tax). The following is a summary
of net unrealized gains (losses) by type of security:
March 31, December 31,
(In millions) 1996 1995 Change
Municipal bonds $32 $60 $(28)
Mortgage-backed securities (18) (4) (14)
United States government bonds 32 91 (59)
Corporate and other bonds (5) 22 (27)
---- ----- ------
Net unrealized gains (losses) $41 $169 $(128)
==== ===== ======
INVESTMENT INCOME. The following table displays the components of TIG's
investment income and mean after-tax investment yields. The yields include
interest earned and exclude realized investment gains and losses. These yields
are computed using the average of the end of the month asset balances during the
period.
Three Months Ended
March 31,
(In millions) 1996 1995
Fixed maturity investments:
Taxable $62 $49
Tax-exempt 11 17
Short-term and other investments 2 2
----- -----
Total gross investment income 75 68
Investment expenses, interest and other (6) (3)
----- -----
Total net investment income $69 $65
----- -----
After-tax net investment yield 4.39% 4.50%
===== =====
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INVESTMENT QUALITY. The table below shows the rating distribution of TIG's
fixed maturity portfolio:
March 31, 1996 December 31, 1995
Market % of Market % of
Standard & Poor's/Moody's Value Portfolio Value Portfolio
(In millions)
AAA/Aaa $3,255 75.7 $3,361 76.4
AA/Aa 201 4.7 369 8.4
A/A 317 7.4 257 5.8
BBB/Baa 163 3.8 119 2.7
Below BBB/Baa 361 8.4 296 6.7
------- ------ ------- ------
Total fixed maturity investments $4,297 100.0 $4,402 100.0
======= ====== ======= ======
TIG minimizes the credit risk of its fixed maturity portfolio by investing
primarily in investment grade securities. To enhance investment yields, in the
fourth quarter of 1995 management authorized the purchase of up to $350 million
in high yield, less than investment grade securities. The information on credit
quality in the preceding table is based upon the higher of the rating assigned
to each issue of fixed income securities by either Standard & Poor's or Moody's.
Where neither Standard & Poor's or Moody's has assigned a rating to a particular
fixed maturity issue, classification is based on 1) ratings available from other
recognized rating services, 2) ratings assigned by the National Association of
Insurance Commissioners ("NAIC"); or 3) an internal assessment of the
characteristics of the individual security, if no other rating is available.
The NAIC has a bond rating system that assigns security classes. These "NAIC
designations" are used by insurers when preparing their annual statutory
financial statements. The designations assigned by the NAIC range from class 1
to class 6, with a rating in class 1 being the highest quality. As of March 31,
1996, approximately 91% of TIG's portfolio, measured on a statutory carrying
value basis, was invested in securities rated in class 1 or 2, both considered
investment-grade by the NAIC compared to 93% at December 31, 1995.
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2.7 RESERVES
TIG's reserves for losses and loss adjustment expenses ("LAE") totaled $3,888
million and $3,886 million at March 31, 1996 and December 31, 1995,
respectively. The process of estimating loss and LAE reserves involves the
active participation of an experienced actuarial staff with input from
underwriting, claims, reinsurance, financial, and legal departments.
Management, using the advice of loss reserve specialists, makes a judgment as to
the appropriate amount to record in the financial statements. This process is a
continuous one, involving regular updates for new information and adjustments of
loss reserves based on the application of management's best evaluation of the
revised data. Such adjustments are reflected in current operations. As
discussed at Item 2.1, TIG increased loss and LAE reserves by $31 million in
first quarter 1996 for certain run-off programs included in Other Lines.
The inherent uncertainty in estimating reserves is increased when significant
changes occur. Examples of such changes include: (1) changes in production
sources for existing lines of business; (2) writings of significant blocks of
new business; (3) changes in economic conditions; and (4) changes in state or
federal laws and regulations, particularly insurance reform measures. TIG has
experienced significant changes in each of these areas during the past several
years. The inherent uncertainties in estimating reserves are greater with
respect to reinsurance than for primary insurance due to the diversity of the
development patterns among different types of reinsurance contracts, the
necessary reliance on ceding companies for information regarding reported claims
and differing reserving practices among ceding companies. This uncertainty is
compounded in the case of TIG Re by its relatively short operating history (TIG
Re was formed in 1987). Internal data must be supplemented with industry data
to provide the basis for reserve analysis. Applying industry data to TIG Re's
business adds an additional element of uncertainty to the reserving process.
TIG's reserves include an estimate of TIG's ultimate liability for asbestos-
related matters, environmental pollution, toxic tort, and other non-sudden and
accidental claims for which ultimate values cannot be estimated using
traditional reserving techniques. Establishing reserves with respect to
environmental liabilities is one of the most difficult aspects of the reserving
process. TIG's environmental claims activity is predominately from hazardous
waste and pollution-related claims rising from commercial insurance policies
written prior to 1985. TIG has not written primary coverage for the major oil
or chemical companies. Most of TIG's pollution claims are from small, regional
operations or local businesses involved with disposing wastes at dump sites or
having pollution on their own property due to hazardous material or leaking
underground storage tanks. In connection with TIG's initial public offering in
April 1993, an affiliate of TIG's former parent, Transamerica Corporation,
agreed to pay 75% of up to $119 million of reserve development and newly
reported claims, up to a maximum reimbursement of $89 million, on policies
written prior to January 1, 1993, with respect to certain environmental claims
involving paid losses and certain LAE in excess of TIG's environmental loss and
LAE reserves at December 31, 1992. At March 31, 1996, the Transamerica
affiliate had incurred no liability under this agreement.
While there can be no assurance that the loss and LAE reserves at any given date
are adequate to meet TIG's obligations, the amounts reported in TIG's balance
sheet are management's best estimate of that amount.
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2.8 LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of an entity's ability to secure enough cash to meet its
contractual obligations and operating needs. TIG requires cash primarily to pay
policyholders' claims, operating expenses, and policyholder dividend
obligations. Generally, premium is collected months or years before claims are
paid under the policies purchased by the premium. These funds are used first to
pay current claims and expenses. The balance is invested in high quality
securities to augment the investment income generated by the existing portfolio.
Historically, TIG has had, and expects to continue to have, more than sufficient
funds to pay claims, expenses and policyholder dividends.
CASH FLOW FROM OPERATING ACTIVITIES. Cash flow from operations for first
quarter 1996, was $50 million compared to $21 million for 1995. First quarter
1996 cash flow was comprised of $61 million positive cash flow for Reinsurance
and $11 million negative cash flow for primary operations (Retail, Commercial
Specialty and Other Lines). This compares to $55 million positive cash flow for
Reinsurance and $34 million negative cash flow for primary operations in first
quarter 1995. Reinsurance cash flow improved in first quarter 1996 due to
continued premium growth and funds held under finite reinsurance contracts.
Negative cash flow from primary operations decreased in first quarter 1996
principally due to a $21 million decline in loss and LAE payments.
INVESTMENT LIQUIDITY. At March 31, 1996, TIG had $103 million in short-term
investments compared to $138 million at December 31, 1995. In addition, TIG
expects to realize $842, $614, and $915 million in cash flow from principal and
interest payments for the next three years, respectively, from its investment
portfolio. TIG has structured its investment portfolio to manage the impact of
market interest rate fluctuations on liquidity. Investments and cash at TIG
Holdings totaled $116 million as of March 31, 1996 compared to $169 million at
December 31, 1995.
RESTRICTIONS ON DIVIDENDS FROM INSURANCE SUBSIDIARIES. The maximum amount of
shareholder dividends which the insurance subsidiaries can pay to TIG Holdings
is limited to the greater of (i) 10% of statutory surplus as of the end of the
preceding year or (ii) the statutory net income for the preceding year except
that such amount may not exceed earned surplus. Accordingly, the maximum
dividend payout to shareholders that can be made without regulatory approval
during 1996 is $157 million. TIG Holdings received $25 million in cash
dividends from its insurance subsidiaries in first quarter 1996.
NOTES PAYABLE. In December 1995, TIG Holdings established a new unsecured
revolving line of credit with maximum borrowings of $250 million. At March 31,
1996, TIG had no outstanding borrowings under this facility. In 1995, TIG
Insurance Company entered into a five-year $50 million revolving direct
financing arrangement with a third party related to the sale and leaseback of
certain fixed assets of which approximately $21 million had been drawn as of
March 31, 1996. In addition, TIG Holdings had $98 million of 8.125% notes
payable maturing in 2005 outstanding at March 31, 1996 and December 31, 1995.
SHAREHOLDERS' EQUITY. Shareholders' equity decreased by $159 million during the
three months of 1996, primarily due to a $31 million net loss, a $83 million
decrease in after tax unrealized investment gains, and $44 million of common
stock repurchases. Accordingly, book value per share decreased to $20.86 at
March 31, 1996 from $23.09 at December 31, 1995. Excluding the after-tax impact
of unrealized investment gains, the book value per share would have been $20.40
at March 31, 1996 and $21.26 at December 31, 1995.
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2.9 GLOSSARY
CATASTROPHE: An event that is designated to be a "catastrophe" by the Property
Claim Service Division of American Services Group, an industry body. It
generally defines events which are estimated to cause more than $5 million in
insured property damage and which affect a significant number of insureds and
insurers.
COMBINED RATIO: A combination of the underwriting expense ratio, the loss and
LAE ratio, and the policyholder dividends ratio, determined in accordance with
statutory accounting practices. A combined ratio below 100% generally indicates
profitable underwriting results. A combined ratio over 100% generally indicates
unprofitable underwriting results.
GROSS PREMIUM WRITTEN: Total premium for direct insurance written and
reinsurance assumed during a given period.
INCURRED BUT NOT REPORTED ("IBNR") RESERVES: Reserves for estimated losses and
LAE which have been incurred but not reported to the insurer (including future
developments on losses that are known to the insurer).
INCURRED LOSSES: The total losses sustained by an insurance company under a
policy or policies, whether paid or unpaid. Incurred losses include a provision
for claims that have occurred but have not yet been reported to the insurer.
LOSS ADJUSTMENT EXPENSES ("LAE"): The expenses of settling claims, including
legal and other fees, and the portion of general expenses allocated to claim
settlement costs.
LOSS DEVELOPMENT: The emergence of actual loss data as compared to estimates
for specific accident years and for specific lines of business.
LOSS AND LAE RATIO: The ratio of incurred losses and LAE to earned premium,
determined in accordance with statutory accounting practices.
LOSS AND LAE RESERVES: Liabilities established by insurers and reinsurers to
reflect the estimated cost of claims payments that the insurer will ultimately
be required to pay in respect of insurance or reinsurance it has written.
Reserves are established for losses and for LAE, and consist of case reserves
and IBNR reserves.
NET PREMIUM EARNED: The portion of net premium written in a particular period
that is recognized for accounting purposes as income during that period.
NET PREMIUM WRITTEN: Direct premium written plus premium on assumed reinsurance
less premium on ceded business for a given period.
POLICYHOLDER DIVIDEND RATIO: The ratio of dividends paid to policyholders to
earned premium, determined in accordance with statutory accounting practices.
PROGRAM BUSINESS: Tailored products developed for a particular industry segment
(i.e., sporting events, trucking) or distribution system (i.e., trade
associations, affinity groups). Programs are often developed and controlled by
managing general agents.
<PAGE>
TIG HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
REINSURANCE: The practice whereby one party, called the reinsurer, in
consideration of a premium paid to it agrees to indemnify another party, called
the reinsured, for part or all of the liability assumed by the reinsured under a
policy or policies of insurance which it has issued. The reinsured may be
referred to as the original or primary insurer, the direct writing company, or
the ceding company. Reinsurance does not legally discharge the primary insurer
from its liability to the insured.
RETENTION; RETENTION LEVEL: The amount or portion of risk which an insurer or
reinsurer retains for its own account. Losses in excess of the retention level
are paid by the reinsurer or retrocessionaire. In prorata treaties, the
retention may be a percentage of the original policy's limit. In excess of loss
reinsurance, the retention is a dollar amount of loss, a loss ratio, or a
percentage of loss.
TEMPLATE UNDERWRITING: A process by which homogeneous business can be
underwritten using standardized guidelines.
TREATY REINSURANCE: The reinsurance of a specified type or category of risks
defined in a reinsurance agreement (a "treaty") between a primary insurer or
other reinsured and a reinsurer. Typically, in treaty reinsurance, the primary
insurer or reinsured is obligated to offer and the reinsurer is obligated to
accept a specified portion of all such types or category of risks originally
underwritten by the primary insurer or reinsured.
UNDERWRITING: The insurer's process of reviewing applications submitted for
insurance coverage, deciding whether to accept all or part of the coverage
requested and determining the applicable premium.
UNDERWRITING EXPENSE RATIO: The ratio of underwriting expenses to net premium
written, determined in accordance with statutory accounting practices.
UNDERWRITING EXPENSES: The aggregate of policy acquisition costs, including
commissions, and the portion of administrative, general, and other expenses
attributable to underwriting operations.
UNDERWRITING RESULTS: The measure of profitability of the insurance operations
of an insurer, calculated as the result of earned premium, less losses, loss
expenses, and underwriting expenses. Underwriting results is an indicator of a
company's underwriting success.
WORKERS' COMPENSATION INSURANCE: Insurance that covers medical care,
rehabilitation, and lost wages of employees who suffer work-related injuries,
and provides death benefits for dependents of employees killed in work-related
accidents.
WORKING LAYER REINSURANCE: Reinsurance which absorbs the losses immediately
above the reinsured's retention layer. A working layer reinsurer will pay up to
a certain dollar amount of losses over the insured's retention, at which point a
higher layer reinsurer (or the ceding company) will be liable for additional
losses. Working layer reinsurance is also known as low layer excess of loss
reinsurance.
<PAGE>
TIG HOLDINGS, INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT 3.1: Amended and Restated Certificate of Incorporation of TIG
Holdings as filed with the Delaware Secretary of State on April 16, 1993
(incorporated by reference to Exhibit 3.1 to TIG Holdings' Quarterly Report
on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-
11856).
EXHIBIT 3.2: Amended and Restated Bylaws of TIG Holdings as adopted by TIG
Holdings' Board of Directors on May 18, 1993 (incorporated by reference to
Exhibit 3.2 to TIG Holdings' Registration Statement on Form S-8, File No.
33-63148).
EXHIBIT 4.1: Certificate of Designation of TIG Holdings relating to the
$7.75 Cumulative Preferred Stock of TIG Holdings as filed with the Delaware
Secretary of State on April 16, 1993 (incorporated by reference to Exhibit
4.1 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended
March 31, 1993, Commission File No. 1-11856).
EXHIBIT 4.2: Indenture dated as of April 1, 1995, between TIG Holdings and
the First National Bank of Chicago, as Trustee (incorporated by reference to
Exhibit 4.2 to Registration Statement No. 33-90594, filed March 24, 1995).
The following exhibit is included herein:
EXHIBIT 11: Computation of Earnings per Share ......................26
(b) The Company did not file any reports on Form 8-K during the three months
ended March 31, 1996.
<PAGE>
<TABLE>
TIG HOLDINGS, INC.
COMPUTATION OF EARNINGS PER SHARE
(unaudited)
<CAPTION>
EXHIBIT 11
Three Months Ended March 31,
(In millions, except per share data) 1996 1995
<S> <C> <C>
PRIMARY:
Weighted average shares outstanding 59.1 61.9
Net effect of dilutive stock options - based on
the treasury stock method using average market
price (A) - 0.1
------- ------
Total primary common shares 59.1 62.0
Net (loss) income $(30.8) $17.6
Less preferred stock dividend requirements (0.5) (0.5)
------- ------
Net (loss) income available to common stock $(31.3) $17.1
------- ------
Net (loss) income per common share $(0.53) $0.28
======= ======
FULLY DILUTED:
Weighted average shares outstanding 59.1 61.9
Net effect of dilutive stock options - based on
the treasury stock method using higher of
average or end of period market price (A) - 0.3
------- ------
Total fully diluted common shares 59.1 62.2
------- ------
Net (loss) income $(30.8) $17.6
Less preferred stock dividend requirements (0.5) (0.5)
------- ------
Net (loss) income available to common stock $(31.3) $17.1
------- ------
Net (loss) income per common share $(0.53) $0.28
======= ======
<FN>
(A)For the three months ended March 31, 1996, the stock options were anti-
dilutive and not used in earnings per share calculations.
</TABLE>
<PAGE>
TIG HOLDINGS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 14, 1996 TIG HOLDINGS, INC.
By: /s/Steven A. Cook
------------------------
Name: Steven A. Cook
Title: Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 4,297
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,411
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25
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386
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